Where is the fairness?

When it came time to prepare the 1987-88 provincial budget, the Howard Pawley government was facing a fiscal predicament. The previous year’s deficit was at a staggering $567 million, a proportionately high total for the era. It wouldn’t be until fiscal year 1995-96 and the advent of a new government that the budget was finally in a surplus situation.

Meanwhile, for fiscal year 1987-88, the NDP provincial government was in a pickle and promised to lower the deficit to $415 million. The question for the government was how to lower the deficit and return to financial sanity?

Well, the Pawley government took what some would call the easy way out — they would raise existing taxes and create new ones, instead of opting for fiscal austerity. Besides the typical tax increases on booze and cigarettes, the provincial sales tax jumped from six to seven per cent (it now stands at eight per cent after another NDP hike in 2013) and additional tax costs on some businesses, including a higher payroll.

Finance Minister Eugene Kostyra heralded the budget as his party’s policy to make big business and the rich pay, while protecting the disadvantaged. The finance minister further promised that his budget would bring fairness and compassion to the province and protect vital services.

Then Opposition Leader, Gary Filmon, said it was the single largest tax increase in any provincial budget and would hurt too many ordinary Manitobans.

“This is the biggest tax grab in our history,” said Filmon, the Leader of the Progressive Conservations in the Manitoba Legislature (Winnipeg Free Press, March 17, 1987).

Among the tax grabs mentioned by Filmon was the new land transfer tax.

“Finance Minister Eugene Kostyra was aiming only at greater fairness, he said, when he announced in his budget what he called an important reform, effective May 15, in land transfer charges,” according to a March 24, 1987, Free Press editorial, entitled, New Definition of Fairness. “The reform will produce an estimated $9.7 million in provincial government revenue this year, but it is incidental. It is not the money Mr. Kostyra was after but fairness.”

The editorial continued: “The puzzling thing about Mr. Kostyra’s reform is the gap between purpose and result. The purpose is to increase fairness and the result is an extra $9.7 million paid into the provincial treasury in the first year.”

The new tax, according to Kostyra, was designed to replace the land titles fee,  which was paid on all land transfers. The land transfer tax was then applied on a graduated scale based on the value of a property: The first $30,000 was tax exempt, the next $60,000 was taxed at 0.5 per cent of the property value and the next $60,000 at one per cent. Anything above $150,000 was taxed at 1.5 per cent.

Of course, the graduated rate would change as the government realized that more money could be earned for the province’s coffers. Once a tax is implemented and is indeed a cash grab, it’s almost impossible for a government to scale it back to a level of “fairness” for all.

In 1987, a house valued at $150,000 was subject to a land transfer tax of $960, whereas before the land titles fee was just $480.

Kostyra’s argument was that the new tax was fair because it gave a break to those purchasing average and low-cost housing.

Under the new tax regime, properties valued at $75,000 saw a negligible increase and a decrease in fees under the value to the Land Titles Office.

At the time, the 1986 average value of a single-family home was $68,500 and $72,000 in 1987.

The Winnipeg Real Estate Board (now WinnipegREALTORS®) argued that the land titles fee was meant to cover the cost of doing title searches and as such was not a form of taxation.

“Any increase to existing fees should be to cover costs and shouldn’t be designed to create surplus for general provincial revenues,” WREB president Neal Fisher told Maureen Murray for a March 19, 1987, Free Press article.

That sounds rather familiar today, although the significant increase in property values since 1987 means that the land transfer tax is significantly more punitive to home buyers. On a home now valued at $250,000, which was roughly the average price of a home in 2014, the land transfer tax hit $2,650. With the average value of the same home now around $280,000, the tax burden becomes $3,400.

In a column for the Winnipeg Sun, published on July 2, Graham Lane, a retired chartered accountant, wrote that Alberta’s title and mortgage registration fee on a $280,000 home is just $95, while in Saskatchewan it is $840.

The tax became more punitive in 2004, when the Manitoba government decided to increase the scale of charges. The $30,000 exemption now remains in place (where in Winnipeg can you buy a home for that price?), the tax is 0.5 per cent on the next $60,000, one per cent on the next $60,000, 1.5 per cent on the next $50,000, and two per cent on amounts in excess of $200,000. In today’s real estate market, most housing purchases are above $200,000.

In 1987, it was argued that the land transfer tax would put Manitoba at a disadvantage when competing with other provinces, such as Alberta and Saskatchewan. And it’s a prediction that is as true today as it was in 1987.

Lorne Weiss, a former president of WinnipegREALTORS® and the Manitoba Real Estate Association (MREA), and now a director with the Canadian Real Estate Association (CREA), said the tax is a particular burden to first-time home buyers.

“With the land transfer tax in place, you (a first-time buyer) don’t need to come up with a minimum down payment of five per cent, but you need seven per cent. And you can’t finance that additional two per cent in your mortgage, you have to pay it in cash when the title for the home is closed.”

That’s why greater savings, often with help from parents, and an extended period of time is needed by first-time home buyers to realize their dream of homeownership.

Surprise, surprise, besides the up-front land transfer tax, a fee is also required to register a transfer of title to the nearest Land Titles Office.

Whatever happened to the promise to replace that fee with the land transfer tax?

Other provinces have given some tax relief to first-time home buyers, while Saskatchewan and Alberta don’t even have a land transfer tax.

Lane argues for some type of Manitoba exemption for first-time home buyers, as does WinnipegREALTORS® and MREA. “Then, revise downward the tax schedule. The current tax brackets should be changed and then indexed for inflation. The top levy of two per cent should only apply to the portion of the sales price that exceeds, say, $600,000. For lower-priced homes, $280,000 and less, cap the tax at $1,000.”

Such changes will go a long way to realizing Kostyra’s 1987 goal of “fairness” in property transactions.